A bad economy and competition from big e-tailers are challenging those who make a living via online marketplaces such as eBay, Craigslist, and Etsy
Ann Wood was thrilled last January when her eBay (EBAY) store, Willow-Wear, had its best month ever, grossing around $33,000. In February, however, Wood experienced a sharp drop-off in sales. Since 2004, Wood has run the home-based business, listing and selling high-end jewelry, clothing, shoes, bags, and antiques for more than 40 clients around the country. She works four to six hours a day, and had sales of about $250,000 in 2007, she says.
"I've still got steady sales and I'm making money for my clients," Wood says, "but I've been seeing more caution from buyers on the items priced for $1,000 and over. People are being smart. They're acting like my husband and I are trying to act, which is to be more careful about purchases and not buying everything we want."
Yet Wood's inventory is growing as her clients scour their closets, hoping to make some extra money selling unused items, and telling their friends Wood can do the same for them. The other bright spot for the former appellate attorney, who became a home-based entrepreneur after her three children were born, is international sales. "A great portion of my stuff is shipped overseas. With the dollar so weak, I've got great deals for people in places like Germany and Italy. I even sold something to Tahiti recently," Wood says.
"Pay to Play"
But overall, it's a tough time for entrepreneurs who sell products through online retailers like eBay, Craigslist (BusinessWeek, 4/16/08), Etsy (BusinessWeek.com, 6/12/07), and myriad other sites. It's also tough to get solid financial data on these individuals, many of them hobbyists conducting virtual yard sales in their spare time, rather than serious business owners. "What we know is that probably half of all online retail happens through companies that are smaller than the top 100 e-commerce retailers," says Sucharita Mulpuru, a principal analyst in the retail division at Forrester Research (FORR).
"I suspect that probably about 60,000 small and medium-size businesses have some sort of Web presence, and another 650,000 sole proprietors are selling through an online marketplace where anybody can upload their product catalogs," Mulpuru says. "I can't imagine that they're doing particularly well in this economy." Small online operations must either sell unique items, such as antiques and collectibles that appeal to niche buyers, or do enough sales volume to keep prices low.
"The challenge is that if they're sole proprietorships, they will not be particularly well-branded. In order to attract traffic, they have to pay for some interactive marketing program, which adds to their expenses and cuts into their margins," Mulpuru says. "They have to pay in order to play, but many of them don't have the resources to do that."
That's not to say lots of people aren't trying. A study of eBay market activity released in May shows that in 2007 the top 10 markets in the country—Los Angeles, New York, Chicago, Philadelphia, Dallas, Orange County, Calif., Washington, Houston, Nassau-Suffolk, N.Y., and Fort Lauderdale—generated more than $7 billion, accounting for 55% of all U.S. sales on eBay. In Los Angeles alone, 196,089 residents sold 24,051,645 items for a total of $1.3 billion in sales, with cell phones, cell phone accessories, and clothing the top categories.
Jacques Stambouli is the CEO of ViaTrading.com, an overstock liquidation firm that provides merchandise for a number of online retailers. "We deal mostly with entrepreneurs and people trying to make a little extra money on the side with home-based businesses. What I've noticed recently is that a lot of people who were doing this part-time are trying to ramp up their activities and spend more time on selling. Others are already selling full-time and they are trying to grow," Stambouli says.
Some of his clients who disappeared two or three years ago have gotten back into the swap meet or online retailing business in the past few months, he says: "If all of a sudden you have to spend $1,000 on gas instead of $500, there's twice as much of your income gone and you still need to eat. There are also a lot of new faces showing up at the flea markets, more people bargain hunting and looking for cheaper ways to buy the same stuff."
The problem for small retailers trying to sell merchandise more cheaply than volume discounters—such as Target (TGT) or Wal-Mart (WMT)—is that they don't have the economics of scale on their side, says David Zahn, president of StartUpBuilder.com. "It is harder [for small e-tailers] to turn a profit, because the pressure is on the e-commerce businesses to absorb shipping costs as many established sites are doing," he says. "For Amazon.com, as well as traditional retailers that have e-commerce sites, such as Staples.com and others, the costs are often absorbed for both shipping to the customer and also from the customer if the item is to be returned. What remains to be seen is if the gas crunch will lead to more online purchasing," he says.
Small eBay sellers have been complaining about the online marketplace's deal with Buy.com, an online volume seller that can offer free shipping and other perks that small store owners feel will undercut their offerings. That agreement, as well as recent price increases (BusinessWeek, is driving eBay competitors as well as eBay itself) (BusinessWeek.com, 1/29/08), to turn up the volume on their appeals to get more small sellers onto their sites.
Some, like newcomer Wigix, are offering alternative business models. "We don't do auction; we operate more like a stock market with open bid orders for everyday stuff. We don't charge anything for listings," says James Chong, Wigix CEO.
The company, which launched in April, is actively recruiting eBay sellers with its free listings and low—or nonexistent—transaction fees. "Every time there's a revolt at eBay, we're getting a benefit from it," Chong says. "The small sellers there are competing with a gazillion other listings and they end up having to pay a lot of extra fees to break out from the clutter. Their margins are being eroded by those costs."
For now, Wood is sticking with eBay and hoping her sales will soon be up again. Her online store, which grosses an average of $25,000 a month, has been doing well so far in July, and she is optimistic. "I'm on track to have another big month, and we're seeing a lot of volume on eBay now," she says. She is experimenting with providing some free shipping as well as increasing her sales listings, upgrading the look of her online store, and letting buyers know she can also sell items for them. "I'm always trying to take a cue from the bigger, higher-volume sellers. Watching smart sellers is how I taught myself this business," Wood says.